Tuesday, September 6, 2016

Why China Booms While America Stagnates

Americans have no reluctance to spend.

Consumption spending in the US, that is expenditures by people, not governments or corporations, equals 71% of the US GDP.

So what's holding back the US economy, which has been essentially flat for years and where real wages have fallen, while the proportion of the working age population that is not working has continually risen to reach a total, today, of 94 million?

The answer: Americans are tapped out. They've spent what they earn and much more beside on credit. But now the banks won't lend them more because they know that the public is at the limit of its capacity to service debt.

So what to do?
Former US Federal Reserve Chairman, Ben Bernanke, said helicopter money would be a solution. In practical terms, helicopter money means lowering taxes while making up the resulting government budget deficit by means of a technology known as the printing press.

The printing press works like this: the Treasury issues bonds to the Federal Reserve, which pays for them by means of a deposit entry in the Treasury's account, i.e., a purely book-keeping operation which conjures money, sometimes called ink money, out of thin air.

Paying less in taxes, people can now spend more.

The Obama administration has pushed this approach to the limit, resulting in a US national debt in excess of the annual GDP.

So, why's it not working?

Because of what Ross Perot warned would be the "giant sucking sound" of jobs going offshore as a result of NAFTA and other "free-trade" deals, especially the GATT agreement of 1994, signed by Bill Clinton, which exposed the American workforce to competition from billions of Third Worlders earning pennies an hour.

That giant sucking sound of jobs leaving is matched by another giant sucking sound: the sound of cheap WalMart merchandise pouring into the US from China, India and everywhere else beside.

Less obviously, billions upon billions in software services, design services, call-center services, and accounting services are also flowing into the US from the low-wage jurisdictions of the world, Third World brains being not only potentially as good as American brains, but often as well educated. In addition, Third World brains much more numerous than American brains and much cheaper to employ.

Thus, Bernanke's solution has proved to be no solution at all. It has increased American consumption and debt without greatly increasing American production upon which the true wealth of the nation depends.

What, then, would actually work?

(A) Tariffs.

(B) Reduction or elimination of US corporate taxes to encourage investment. (Corporate profits would still be taxed, but only when paid out to shareholders, at which time they would be treated like any other income. Importantly, though, corporations would have the option of reinvesting untaxed profits to expand production, or R and D,)

(C) Massive infrastructure expenditure aimed at lowering American production costs.

This is the Trump solution, about which the only question is: where will it be tried first?

Britain, Japan, the EU. They're all floundering economically for the same reason that America is floundering economically — loss of productive output. One of these days, some government, somewhere, will surely adopt the obvious solution to the West's current economic malaise.

As for China, they've followed the Trump prescription for economic growth for decades. Hence China's extraordinary economic success.